September 25, 2013

Value and profitability: Confidential insights from the managing partner of an AmLaw 100 firm (Part 2 of 2)

When I asked this AmLaw 100
managing partner how well individual partners understood which matters and
relationships were profitable and which were not, he replied:

I
would say we’ve got people that don’t understand it very well at all, like a 1,
and we’ve got some who understand it very well, like a 10. Probably if you
averaged all that out, we’d be 5 trending towards 6, or 6 trending towards 7.
We’ve come a long way, but we still have a long way to go on that.

This led naturally to a question
about how many lawyers have started changing their behavior to meet all these
new challenges, and how many had completed the transition to the new normal. Since
this particular firm has been so proactive, the numbers he quoted below were
much higher than we have heard from other firms:

I
think 100% of them have started to change the way they practice, because we
make it such a feature in everything we do and everything we talk about that
it’s sort of impossible for anybody to be here and not have changed somewhat. However,
I think that very few have changed enough that they can fully meet clients’
needs. I think probably a few have, but less than 10%. There’s a lot of upside.
The bad side of all this, the way I look at it is, it’s not going away. The
good side of it is, we’re moving the needle, and yet there’s still a lot more
upside if we can get better at a number of things.

I then asked a few questions
about our eight key issues in LPM: defining
scope, scheduling activities, managing teams, planning budgets, avoiding risks,
managing quality, managing communications, and negotiating changes of scope. Which
are most important and need the most improvement? The answers have varied from
firm to firm. At this firm, one of the biggest issues is defining scope:

There’s
no question that this is an art that needs to be developed further, because we
find sometimes with clients that the people we work out the sale with aren’t
the same people that we work out the delivery with. Whether the scope has been
properly defined or not becomes a really big deal, and changes in scope needing
to be negotiated depends upon how well you defined the scope in the first
place. This is something law firms have not historically done well, compared
to, say, contractors and others who are used to a fixed fee type environment.
So there’s a lot of room for improvement.

Another possible area for improvement at this firm is team
management:

Management
is a skill that is not natural to lawyers. We’ve always been trained to get the
case done well to win, but now we have to get the case done well to win, and
also efficiently, whatever the arrangement has been. And that last piece is not
part of the natural toolkit for most people, so that’s where the project
management need for improvement is greatest.

Team management is particularly critical for this
firm because when I asked about the most important steps this firm has taken to
provide greater value, the managing partner replied:

I
would say the biggest thing for us has been an increase in the non-hourly based
pricing structures. Our non-hourly business is running at about one-third of
our new business, and probably 25% of the fees collected last year. And that’s
maybe a 20% increase from the prior year. So that’s a pretty steep curve… I
think where we have the most need for improvement is where we have some big
fixed fee projects where we haven’t been able to utilize the lower cost lawyers
and where we have too many higher cost lawyers operating under the old business
as usual model. The profitability or realization of that work is much lower
than the average. That’s a function of the project management not yet fully
taking hold on those big engagements.

Finally, I asked about whether
clients needed to also change their ways to make the new normal work. In every
single interview to date, the answer has been a resounding yes. Here are the
suggestions from this managing partner:

Clients could get more out of their law
firms if they fully embraced change and trusted it. For example, we have a
client that does a lot of fixed fee work with us. They require almost every
project to be a fixed fee, yet we still have to submit detailed time reports
that they use to see how they’re doing. So I say to them, “Look, you basically
use us to employ people and spend time preparing reports that you really don’t
need, which makes the cost of our business higher. And if you’re comfortable
with the deal that we’ve struck, you want us to be incentivized to find ways to
do it more cheaply and be more profitable, so you can push us harder to cut the
price more. But by requiring all the old fashioned reports as a belt and
suspenders, you force us to keep our costs higher than they would be.” So I
think clients can more fully embrace what they are starting to embrace, and
that would incentivize the firm to really get greater alignment with the
clients, and be even more efficient.

Given
the pace of change and the difficulty of predicting the future, it is not
surprising that other firms have provided different suggestions for changing
both client behavior and their own. I will continue to post previews like this
as the research continues, and a full report will be published next year, after
we complete all the interviews and our analysis.